Directors & Shareholder Claims: 3

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Understanding the options – 5 tips

As discussed in previous posts, Boardroom and shareholder disputes arise for many reasons. When they do, it is important to understand the legal rights of all parties and the options available. The consequences of allowing things to drift and potentially get worse shouldn’t be ignored. There are options which help make life easier.

  • If you are a minority shareholder in a company, what happens if you have a disagreement with the majority shareholder, or a group which has more control?
  • How do you solve the problem, or even avoid a dispute?
  • In the third of this series, here are five important tips:

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1] Shareholder Agreements

The House of Lords in Russell v Northern Bank Developments Corp Ltd[i] emphasised the practical utility of Shareholder Agreements. These are used for a wide variety of purposes, adding significantly to the company’s constitutional regime of Memorandum and Articles. This includes providing personal rights to minority shareholders who otherwise have no control over fundamental points.  The minority shareholder’s concerns would be more difficult to deal with unless specifically covered as an enforceable private contract between members.

These should be provided in the Shareholder Agreement, covering similar areas to partnership agreements.

The benefits include avoiding future misunderstandings and practical difficulties in running the business.

A Shareholder Agreement typically deals with issues such as:

  • restrictions on transferability of shares
  • lack of a market for sale of shares
  • establishing a purchaser
  • formulas for valuation and funding
  • pre-emption rights
  • compulsory transfer or option arrangements
  • protection of minority members by permitting a veto
  • preserving confidentiality
  • efficient transfer on death, disability, retirement
  • estate planning
  • regulating management and involvement of investors
  • mechanisms for dealing with stalemate.

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2] “Unfair Prejudice” Petition
Section 994 of the Companies Act 2006 permits a shareholder to petition the court on the basis that the shareholder’s interests have been unfairly prejudiced in the conduct of the Company’s affairs due to e.g. breach of:

  • the Articles of Association
  • the Shareholder Agreement
  • fiduciary duties by directors
  • exclusion of a minority from the running of the company in small “quasi-partnership” companies.

The Court has wide discretion to grant the relief it decides is appropriate. This is often an order that the aggrieved minority shareholder’s shares are purchased for ‘fair value’. This may include a premium on the actual value of the shares as recompense to the petitioner for any wrongdoing by the majority.

3] What is a ‘derivative claim’ – S.260 of the Companies Act 2006?

In certain circumstances a shareholder can ask the court to prevent action being taken by the Directors which is harmful to the company, or make a claim against the Directors for any loss suffered by the company as a result of their action.  The claim must be made by the shareholder on behalf of the company. The shareholder’s right to bring a claim “derives from” the company. This is a claim made in a “representative capacity” by the individual shareholder, not on the shareholder’s own behalf. It is the company which is suffering the harm.  The damage to the company may also harm the shareholder indirectly, e.g. if there is a reduction in profits or other damage suffered.

Derivative claims are relatively unusual because although it is the member who issues the court proceedings as claimant to launch the action, the court must give permission for the claim to continue to trial.  A number of tests have to be satisfied before the court will give permission.

The shareholder runs a risk on costs and at least initially has to fund the claim themselves. It is possible to obtain an order that the company indemnify the member, although they may obtain no immediate benefit themselves by launching the court case. However, if the claim succeeds, the company will have been protected. Ultimately, that should benefit the shareholder because it protects their investment in the company.

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4] What is a claim under S.122(g)  of the Insolvency Act 1996?

Any shareholder may apply to have a company wound up on “just and equitable grounds” including in quasi-partnerships, involving the shareholder’s right to manage the company – Ebrahimi  v Westbourne Galleries Ltd[ii]. The sole remedy here of winding up is draconian, available only in specific circumstances. This is the “nuclear option” in shareholder disputes – the aggrieved shareholder petitions the court for a winding up order to terminate the company.

Usually the shareholders’ differences have become irreconcilable and a ‘commercial divorce’ is the only way to move forward. When a company is wound up, if there is anything left after paying the creditors and the liquidator the proceeds are divided amongst the shareholders.

Not every aggrieved shareholder will be able to justify a winding up petition to the court. There must be compelling reasons showing that the company can no longer continue.  The aggrieved shareholder has to prove there will be a concrete benefit in making a winding up order.  If there is some alternative remedy, which would allow the company to continue, the court may refuse to make the order.

A typical scenario where a winding up may be justified is where there is deadlock or stalemate between two or more shareholders in a quasi-partnership company which can’t be resolved. Where there is an aggrieved minority shareholder, experience shows that the majority shareholder will seek to dispute:

  • the complaints by the minority that there was any “quasi-partnership” in the first place
  • the circumstances of any alleged unfairly prejudicial conduct
  • the alleged value of the business
  • the aggrieved minority shareholder’s share

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5] Finally

The sooner informed negotiations start, the more likely it is that a private business will survive a shareholder dispute. A comprehensive Shareholder Agreement can help to preserve operations and resolve matters quickly.

Expert legal advice early on could keep the process out of prolonged, expensive and destructive litigation. This is by providing the facts, insight and information to allow all parties to make informed decisions quickly. This would ultimately be to the benefit of the company as a whole and the shareholders individually.

For further information regarding minority shareholder / business disputes and unfair prejudice petitions contact Paul.Sykes@lf-dt.com

[i] [1992] 1 WLR 588

[ii] [1972] 2 All ER 492

Unfair Prejudice & Drag Along

Minority Shareholder wins Quasi Partnership claim

8 Ways to avoid a Business Dispute

Are you a Shadow or de facto director?

Service of a Claim Form on a Director

WHEN DIRECTORS FALL OUT

Disclaimer

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Directors & Shareholder Claims: 2

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Resolving Boardroom Conflict  – 5 More Tips

Disputes between shareholders of private companies are often emotional and can be as complicated as a personal divorce. The disruption to any business can be extremely damaging. Knowing what remedies are available to resolve matters quickly could be the key to survival.

  • What if the majority is taking unfair advantage of you?
  • What if you suspect co-shareholders are stealing from the company?
  • In the second of a series, here are five further important pointers to be aware of:

1/ Protecting the Minority

There is a common misconception that the complex laws and regulations relating to companies should achieve a just and fair relationship between a minority shareholder and the majority. However, there is very little law which protects the minority, unless the parties have agreed beforehand.

Differences between shareholders don’t always arise because of power struggles or personal animosity. Frequently, disputes are down to differences in approach where one party wants to retire or withdraw their investment. Disagreements may centre on

  • timing
  • valuation issues
  • the direction of the company

The public courts are unlikely to be the ideal venue for resolving shareholder disputes. Proceedings are in the public domain and the procedure can be expensive and slow.

Particularly where private companies are concerned, there are effective alternatives, including: negotiation, mediation and arbitration.

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2/ Shareholder Agreement

An effective way to address potential problems before they arise is a Shareholder Agreement. This sets out ground rules for the shareholders in given circumstances. Many potential and predictable problems can be addressed in advance in a Shareholder Agreement. This leaves the shareholders to concentrate on managing the business, rather than a future internal dispute.

Amongst other things, the agreement can cover:

  • management responsibilities
  • non-competition restrictions
  • bonus and remuneration formulae
  • approval/decision process for major corporate decisions
  • buy/sell provision – e.g. a “shotgun clause” to force a transaction
  • how a shareholder can realise his or her investment in the company
  • whether to impose any restrictions on selling shares
  • criteria on valuing the shareholding
  • exit provisions – timetable for sale
  • appointment of an independent third party to value the shares
  • a detailed dispute resolution framework

 

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3/ What is an “Unfair Prejudice” claim?

The majority shareholders are in a powerful position, even where there is a Shareholder Agreement. However, the court will protect the position of minority shareholders from being abused in certain circumstances.

Section 994 of the Companies Act 2006 allows a shareholder to apply to the Court for an order declaring that the affairs of the company are being conducted in a manner unfairly prejudicial to the minority shareholder’s interests. If the court agrees, it will usually order that the shares of the minority shareholder are bought for fair value. However, the Court has a very wide discretion as to what it can order, including:

  • purchase of the shares of any members of the company by other members or by the company itself and, in the case of the purchase by the company itself, the reduction of the company’s capital accordingly
  • conduct of the company’s affairs in the future
  • company to refrain from doing or continuing an act complained about, or to do an act about which the petitioner has complained that it has omitted to do
  • civil proceedings to be brought in the name and on behalf of the company by such persons and on such terms as the court may direct
  • company not to make any, or any specified, alterations in its articles without the court’s permission

4/ When might a court find “unfair prejudice”?

Where a minority shareholder believes that the company is being run in a way which is unfairly prejudicial to some of the shareholders, the aggrieved shareholder can make an application to the Companies Court for a remedy. Unfairly prejudicial conduct may include for example:

  • majority shareholders paying themselves excess remuneration
  • majority shareholders failing to pay dividends
  • breach of duty by diverting business to majority shareholders or their connected companies
  • directors selling or buying assets at an unfair price
  • failing to pay declared dividends
  • undertaking activities which are not permitted under the company’s Articles
  • doing something which might result in the company’s insolvency
  • failure to follow company law or proper procedure on meetings.
  • failure to issue annual accounts

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5/ “Quasi-Partnership”

In small to medium sized private companies, the court might be persuaded that a “quasi-partnership” exists. The aggrieved party may complain that there is a breach of their ‘legitimate expectations’ about what the company was set up to do, and how it would be run. E.g.

it was agreed, or a common intention is proved:

  • the company would carry on a particular business
  • all would be entitled to an equal say in how the company is managed
  • a mutual expectation of continued employment
  • the directors would be fair when deciding on the salaries to be paid, the amounts to be kept in the company to fund growth, and the dividends to be paid out

If the court decides that a quasi-partnership exists, termination of that arrangement or unfair prejudice to the minority may result in the majority being obliged to buy out the shares of the aggrieved minority shareholder. If the majority acts in breach of such

“legitimate expectations”

the court may intervene.

Where an aggrieved shareholder has cause for complaint, urgent action is required. The court may refuse to interfere if a minority shareholder let the matter slide. The court will treat this as acceptance of the action taken by the majority:

“delay defeats equity”.

The court will consider all of the background circumstances on an application, including the minority shareholder’s own conduct.

These applications are rarely straightforward and are often settled by negotiation before the court is asked to make a final decision.  Quite often, one or more of the shareholders leave with a package.

For further information regarding minority shareholder / business disputes and unfair prejudice petitions contact Paul.Sykes@lf-dt.com

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Directors & Shareholder Claims: 1

Unfair Prejudice & Drag Along

Minority Shareholder wins Quasi Partnership claim

8 Ways to avoid a Business Dispute

Are you a Shadow or de facto director?

WHEN DIRECTORS FALL OUT

Disclaimer

 

 

 

 

Directors & Shareholder Claims: 1

How to break the deadlock – 8 tips

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Boardroom and shareholder disputes can arise for many reasons. When they do, it’s important to understand the legal rights of all parties and the options available as well as the consequences of allowing things to get worse. However, there are some options which can make life easier:

  • If you are a minority shareholder in a company, what happens if you have a disagreement with the majority shareholder, or a group which has more control?
  • How do you solve the problem, or even avoid a dispute?
  • In the first of a series, here are seven important pointers to be aware of:

1/ Minimal Influence

In company law, a minority shareholder (anyone with 49% or less) has minimal influence over the management of the company or the distribution of its profits.  The standard constitution of a company and rules under the Companies Act give little protection to a minority shareholder.

Differences can and do arise as the business evolves and personal circumstances change:

  • there may be differences on strategy or the direction of the company
  • power struggles and poor personal relationships may develop
  • shareholders may wish to retire or disagreements occur on service contracts and remuneration.

There are ways in which the minority shareholder’s interests can be protected, either by agreement with the other shareholders or as a last resort by taking action through the courts.  It is easy for entrepreneurs to preference the initial brokering of a deal, and getting the new business up and running, over longer term, but equally important considerations.  But it’s always advisable to consider these scenarios at the beginning.

2/ Shareholder Agreements

A shareholder agreement is a must for a private company, especially where there are a relatively small number of shareholders who also manage the business. These don’t always arrive without (you) the minority shareholder/s pressing for one. You need to proactively pursue this as part of the start up, or failing that, you should put it at the  top of the agenda.  In a Shareholder Agreement, the majority shareholder usually gives up some rights to the minority.

The process of preparing the Agreement helps shareholders address points which could become potential problems. This encourages the key players to work through the issues early, when everyone is positive and communications are still good.

It’s much more straightforward and economic to deal with this as part of the start up, rather than risk the expense and uncertainty of going to court later.  All concerned will know where they stand where there is a Shareholder Agreements. It reduces the risk of conflicts arising or getting out of hand.

An existing businesses can certainly set up a Shareholder Agreement at whatever stage in its evolution, for example when one of the main shareholders is considering retiring or their circumstances have changed.

It is also worth remembering that a Shareholder Agreement

  • is confidential
  • doesn’t have to be filed at Companies House
  • sits behind the company’s public face
  • is a private document between the shareholders.

 

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3/ Points to Cover

A Shareholder Agreement can go a long way to ensuring disputes are avoided or at least, provide the mechanism that allows them to be settled quickly. An agreement identifies shareholders’ specific responsibilities and outlines how and where disputes are to be resolved. For example, it can specify forced buy/sell provisions during a dispute and even include a formula or other means to determine the transaction price.

Amongst other things, the Agreement can cover:

  • key objectives
  • financing and borrowing
  • dividends, directors’ fees and salaries / profit distribution
  • controls on the appointment of Directors
  • major expenditure
  • exit mechanisms – for shareholder deaths, misconduct, divorce, incapacity, etc.
  • fair valuation process for transfer of shares
  • succession arrangements – insurance of key persons
  • dispute resolution

The Shareholder Agreement gives minority shareholders a say in the business and some security. Without one, the minority would have little impact on decisions regarding the company and protecting their interests.

4/ How to enforce my rights as a shareholder?

Negotiation is the key, this should be explored first, rather than threatening legal action. However it is important to know your legal rights, and the provisions of the Company constitution.

  • How do these apply to your position and the other interested parties?
  • It may be necessary for you to obtain details or documents as part of the process, which the company is reluctant to provide.
  • Take legal advice early on as to the pros and cons, the likely outcome, and the likely timescales and costs

Even where proceedings are issued, frequently a solution is reached through negotiation. This is usually much quicker and cheaper than having a decision imposed by the court. However, it may be necessary to exercise leverage by relying on your strict legal rights to achieve any progress.

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5/ Solutions

There are various options, including:

  • proposing a resolution at a general meeting which redresses the situation
  • complaining to the police of any criminal acts
  • asking the board of directors to take action in the company’s name against an individual director (because the shareholders can’t sue in the company’s name)
  • using a mediation service to settle a dispute.

6/ Mediation

A mediator will be someone who is experienced in this area of law.  If agreement is reached with the help of the mediator, the compromise can be recorded in a legally binding document which can be enforced in the court, if one of the parties breaks it. The advantages of mediation include its relative cheapness compared to going to court, privacy (there is no public record) and speed.

If it isn’t desirable or possible to achieve an accommodation where the aggrieved shareholder stays in the company, other solutions include:

  • the other shareholders buy out the aggrieved shareholder at a fair price
  • the company buys back the aggrieved shareholder’s shares at a fair price
  • Make a reasonable offer to the aggrieved shareholder.

7/ Further Options

Where the Company refuses to cooperate, further options include:

  • applying to the court for an order that the company is acting or has acted unfairly (an “unfair prejudice” action under s.994 Companies Act 2006)
  • applying to the courts for the company to be wound up under s.122 of the Insolvency Act 1996
  • suing the directors for negligence by means of a Derivative Action under s.260  of the Companies Act 2006:

The courts encourage settlement of all disputes, including shareholder disputes. Where the majority has made a reasonable offer to the aggrieved minority shareholder to buy them out on reasonable terms, it is unlikely that the majority will have acted ‘unfairly’. Then it wouldn’t be ‘just and equitable’ to wind the company up. It is essential to take advice on the terms of any offer you make.

If you offer to go to mediation or alternative dispute resolution, you are also unlikely to have acted unfairly. However if the company is in financial difficulties a creditor may issue a petition under S.122 of the Insolvency Act, irrespective of the shareholders’ wishes.

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8/ Finally

Where the Court decides that a minority shareholder has been oppressed or unfairly prejudiced and the appropriate remedy is for the majority buy the minority shares, this is often done at a “fair value” i.e. fair market value, without deduction for a minority discount.

Where the majority gives an undertaking to buy the shares of the aggrieved minority at fair value, usually the court will adjourn the unfair prejudice petition.  However, the fundamental battle ground is frequently

  • the basis of the business valuation
  • the underlying assumptions
  • the data and criteria on which it is based.

The valuation of a private company is an area of potential significant difference between the parties. These can be quite complex disputes, but qualified and experienced legal advisors and valuation experts hired early in the process will help you through this potentially sensitive and difficult area.

paul.sykes@luptonfawcett.law

Disclaimer

LINKS

Unfair Prejudice & Drag Along

Minority Shareholder wins Quasi Partnership claim

8 Ways to avoid a Business Dispute

Are you a Shadow or de facto director?

 

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Santa’s Lawyer: World Exclusive

Unauthorised Interview!christmas-1015324_1280

 

 CAUTION:  Broad minded, consenting adult’s supervision required:
Spoiler Alert Especially “next to last ” Q&As

In the run-up to Christmas, everyone knows Father Christmas and his elves are extra busy, but we managed to track down one of the unsung heroes of Santa’s Kingdom

*Father Christmas’s Lawyer*

We asked him, or her (because of the extreme sensitivity of the position, we were asked to keep the lawyer’s identity confidential!) to fill us in on a few secrets.

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Here is the exclusive and previously unseen, unheard and unheralded low down on crucial legal issues that Father Christmas currently faces!

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THE TRANSCRIPT

Q1: In times of increasing regulation and potential litigation, how do you defend Father Christmas – He faces accusations of setting a bad example, putting his life and the lives of others at risk through breaches of health and safety laws?

A1: Well, thank you for asking me and showing such an interest. This is a big thrill for me, I love my work, being Father Christmas’s lawyer, and answering all the questions that everyone has around the world at this special time.

Q2: Landing a sleigh on the roofs of houses and climbing down chimneys to deliver sack-loads of questionable gifts – is that a good example for Santa Claus to set for children everywhere?

A2: But it’s not just at Christmas time – this is a 365 day a year operation in the law offices at Santa’s Grotto back home. Of course we have 24/7 remote access for Father Christmas whenever he might need any legal advice or counsel.  But the thing is, Father Christmas never really needs any advice because, well he’s omnipotent. And omniscient. He’s all knowing. He knows everything – I’m not saying he’s a “know all”, he’s just great to work for!

Q3: You haven’t really answered any of my questions – these are serious issues and Father Christmas has to come clean.

A3: I’m sorry, it really is appreciated and what a great first question. It’s certainly a pleasure to be here, and may I say a big “Happy Christmas!” to you and all your subscribers!

Q4: There is a growing charge sheet: Santa Claus is accused of promoting drunk driving, speeding, breach of the Highway Code, reckless endangerment by flying livestock without a permit and climbing down chimneys.

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A4: I want to pick you up on some conflation in your questions. You are talking about Father Christmas and Santa Cluas interchangeably, as though they were one and the same, and that there is only one of them. And that he (or she) exists.  So am I in fact – that’s great! Now that might be your perception, and the presumption behind your question. I’m happy to go along with that. But no warranty is intended or to be implied, you must rely on your own searches or enquiries. No liability is accepted, and the usual exceptions and limitations apply (see rider).

 

Q5: Are you saying that there is a turf war going on – the public have a right to know?

A5: Well I appreciate the insight, and I know how much you love a scoop! Having said that, I have to be mindful not to disclose any details of any historic confidential settlement of any joint venture, or ventures, existing or not, known or unknown, all names rights, territorial and exclusivity protocols between the various jurisdictions and entities. I hope you understand.

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Q6: He flagrantly refuses to wear a seatbelt or crash helmet!

A6: But as you well know, Father Christmas has magical powers. He’s been doing this for centuries. He’s very expert, and he does what he does – you know?

Q7:  OK, I can see you aren’t going to be drawn, but what about some specifics? What about, say the Work at Height Regulations 2005? Isn’t Father Christmas in contempt of Parliament and of RoSPA?

A7: I’m so glad you asked me that. You know, it isn’t reasonably practical for him to avoid working at heights. The defence of necessity is an obvious response, but Santa adopts best practice and a safe system of work. This is regularly checked, updated and monitored. The sleigh has protective rails to prevent a fall. A descent mitigation system operates so that in the unlikely event Father Christmas has an accident, he is protected. Plus, he can fly.

Q8: What about occupier’s liability – isn’t it an imposition that people visited by Father Christmas, maybe on an unsolicited basis have obligations thrust on them without consent? Shouldn’t they be worried that Father Christmas could sue them?

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A8: Householders have duties to all visitors, to take reasonable steps to make sure that the area is safe and in particular that Santa and the reindeer are not injured, or the sleigh damaged. Your roof needs to be in good repair and the chimney mustn’t pose a risk of injury. However, if you don’t have a roof or chimney, or the roof is in disrepair, or your chimney is blocked, or ablaze, don’t worry; this will all have been subject to rigorous hazard analysis ahead of time. Father Christmas knows all about your home and its environs. This is just basic for him. No, that’s not creepy.

Q9: But a question all children want answering – how does Father Christmas get in?

A9: Father Christmas can get past even the most challenging obstacles. Obviously I am not at liberty to disclose how exactly, but Father Christmas makes sure that all the good little boys and girls get their presents. Some grown-ups just stay awake to let him in on Christmas Eve. Others assume he gets in through a door, a window or even an air vent.  As a last resort Father Christmas uses his magic key, but I guess you knew that already?

Q10: What if Father Christmas was breathalysed? Anecdotal evidence suggests he takes an alcoholic drink at almost every other house – doesn’t this make him unsafe on the roads and in the air. Couldn’t he be arrested and banned?christmas-1070830_1280A10: We are well aware of our duties and responsibilities, for example for every pilot the limit is 20 milligrams per 100 millilitres of blood.  In England and Wales for drivers it’s s 80 milligrammes of alcohol per 100 millilitres of blood, 35 microgrammes per 100 millilitres of breath or 107 milligrammes per 100 millilitres of urine.

Q11; You seem to be over- familiar with that, which isn’t reassuring. Does Father Christmas have an on-board breathalyser?

A11: The average human could be over the limit after a wee dram of whisky, tot of rum or snifter of port. Even too much brandy butter on a mince pie is risky for pilots. But it should go without saying that Father Christmas is an exception.

Q12: Are you saying he is a substance abuser?

A12: I can’t disclose personal medical details, but your question makes a lot of assumptions; who’s to say that Father Christmas’s blood stream is the same as ordinary mortals? At this time of year it could be running on 100% undiluted sweet sherry – I couldn’t possibly comment. But you just have to ponder the prejudices and assumptions underlying your questions to reveal their underlying fallacy.

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Remember everyone, Father Christmas supports responsible drinking for all the good people out there, fundamentally though, he embodies the “Spirit of Christmas.”

Q13: Aren’t you just an apologist for an international criminal racket? Santa flouts Regulations against importing merchandise or animals without permits.  Shouldn’t Santa and his reindeer be arrested, kept in quarantine or even destroyed? Santa’s sacks of toys would also be confiscated as he circumvents customs and imports them illegally, and let’s not get started about the serial Data Protection offences.

A13: I think you are over reacting. Don’t forget, Father Christmas is a supernatural being, transcending cultural, theistic, legal and international norms.  His actual whereabouts (intended plural) at any given time are an undisclosed secret. Although there are various authorised outposts including in Lap Land and the North Pole, Santa’s Kingdom is protected by International Reciprocal Treaties.

 

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Q14: Isn’t it time that an International Arrest Warrant was issued against the fugitive, Father Christmas?

A14: Father Christmas has never been arrested or tried. He would have to be arraigned before a court of his peers. I doubt Jack Frost, Mother Nature, Neptune, the East Wind and the Green Man are ever going to agree to give these defamatory accusations any legitimacy. On a procedural basis, however, the unique off shore nature of Santa’s business centres provides no address for legal service of any proceedings. No applications for alternative service against Santa have ever been upheld. In any event, Santa obviously has a magic hour glass so that any proceedings would effectively be, or be construed as being out of time.

Q15: It has been rumoured that Rudolph is taking legal advice on a number of claims – exploitation, equitable accounting; breach of copyright, unauthorised image use and failure to pay Royalties on merchandising. How do you respond?

A15: I speak entirely hypothetically, because I am not going to breach client confidentiality or privilege. Firstly, I can neither confirm nor deny that Rudolph is a red nosed reindeer, known to my client. Secondly, we rely on universal legal principles, recently reaffirmed in the UK, that an animal has no legal personality, and cannot bring any action.

Q 16: Really, isn’t that anti-equality?

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A 16: Absolutely not. Mr Justice Snowden in November this year in the Chancery Division of the High Court dismissed a claim for damages brought by two dogs. Amongst other things, this was on the basis that CPR Part 2.3 (1) defines “Claimant” as a person who makes a claim, and a dog is not a person.  How could a dog, or a reindeer give instructions to bring any legal proceedings, let alone sign a certificate of truth, give an undertaking, pay court fees, give security for costs, or comply with an order of the court?

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Q17: But what if Father Christmas was sued, say by the Elves for breach of Working Time Directives?

A17: The elves would never sue Santa, he is their spiritual Father, and they love him, even when he’s feeling grumpy. All insinuations are denied and Santa’s Workshop adopts a progressive full participation, grant aided Share Ownership scheme and cooperative partnering philosophy. So the Elves own the business.

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Q18: What about Father Christmas’s personal liability for all of the risks that he runs?

A18: There are unresolved questions, which I’m not going to comment on here regarding the existence or otherwise of any relevant Declarations of Trust, Corporate Constitutions and business matrix. Whether Father Christmas is a sole trader, a partner (whether with Mrs Claus or otherwise as an LLP Member), an employee, director, shadow director from 26 May 2015 under the Small Business, Enterprise and Employment Act 2015 so that the general duties of directors under sections 170-177 of the Companies Act 2006 apply, or a Registered or Unregistered charity, Unincorporated Charitable Association, Community Interest Company, Club, Credit  Union  or unregulated spiritual being is best left for others to ponder. But if you sue him, I can assure you the outcome is assured – your ass is grass!

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Q19: There are unconfirmed reports of an Anti-Trust, Monopoly and Cartel busting consortium being launched with backing from The Grinch and Scrooge Enterprises. They are petitioning in the United States for interventions under the Racketeer Influenced & Corrupt Organizations Act (RICO).  What’s your reaction?

A19: Any jurisdiction, liability, locus standi, causation, quantum and limitation would be denied. Preliminary issues include whether any claim was against Father Christmas or Santa Claus, or Santa’s Grotto. Fundamental issues of fact and law, not to say theology, natural laws and physics would need to be explored and proved. You shouldn’t overlook the fact that if he exists, he will undoubtedly have diplomatic immunity, as will all his manifestations, subsidiaries, servants, agents and employees. All are Envoys of the Winter Wonderland and Santa’s Grotto which are non-justiciable and impervious to any such moves by the misguided entities you mention.

Q20: What if Wizzard  or Slade, and Mud and a vast number of other British groups from the 70’s and other less eclectic decades (from a popular music perspective) all brought a Class Action for passing off against Father Christmas and an account of profits? Might he go bankrupt?

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A20: I think it more likely that he has a theoretical claim against them. Moreover, even if there was any claim, it would be very difficult to empanel a jury or identify an impartial Judge who wouldn’t recuse themselves for either being on or off the Nice List.

Q21: How do you respond to critics like Dr Nathan Grills of Australia’s Monash University who says Santa’s “rotund sedentary image” has had the effect of making “obesity synonymous with cheerfulness and joviality” around the world?

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A21: Father Christmas is certainly a role model for his unfailing generosity, devotion to duty, get up and go and can do attitude. It is worth noting that the European Court of Justice has this December again ruled that obesity can be classed as a disability, so employers and individuals alike are best advised to avoid discriminatory behaviour.

Q22: Father Christmas has a reputation for being popular with the ladies; but what when it goes further? Witnesses report seeing Mommy Kissing Santa Claus, under the mistletoe, tickling Santa under his beard. Won’t this be traumatic for the children – would Daddy be able to sue Santa Claus for intermeddling in marital harmony?

 

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A23: Well this is a horny old chestnut isn’t it? It’s true that Santa does have to have his wits about him, if he is to avoid being propositioned by the over-amorous. He has 20 million households to service in the UK alone. Santa has regular situational and observational training a la Jason Bourne and the Sioux, equipping him to handle anything that might arise, whether he’s being asked to fill his boots or empty his bulging sack, or otherwise importuned when about his lawful business.

Q24: There must be a putative claim to come out of the closet?

A24: It is highly doubtful that there could be any legal claim, even in theory: most jurisdictions have eliminated the tort of “alienation of affection” as a matter of public policy, either by statute or court opinion. Even where the tort survives in theory, “eulogistic commendation of the res vendita”, has only ever made Father Christmas more committed to ensuring satisfaction guaranteed.

Q25: What do you say to people who say Santa Claus doesn’t exist – how do you prove he does?

A25: There have been few legal cases on the subject, not surprisingly, because of the difficulty for example of conflict of laws, cross border and jurisdictional issues, identification evidence and other jurisprudential matters. How are you going to serve Santa Clause with any proceedings, or prove service, not least if you assert his non-existence?

Q 25: Your having a giraffe, right?

A25: Nevertheless – No. There have been some interesting cases. One that was before my time and which I call to your attention, which I don’t necessarily rely on as setting a precedent or having any basis in reality, but which you may nevertheless think might be of at least persuasive authority:  Judge Michael Musmanno of Allegheny County, Court of Quarter Sessions of Pennsylvania in 1936 reportedly opined 

In re: The Legality and Authenticity of Santa Claus

“….Santa Claus is a reality recognizable by the law and he will be protected in this court against all aspersions and insinuations to the contrary…. Santa Claus is the symbol of amiable kindness; he is the token of smiling charity he is the badge of all that is cheerfully benevolent in the make-up of man. The best judge is he who walks with Santa Claus.

On weighing all the evidence in the case, which was made up of the testimony of the season, the attestations of the human heart, and the exhibits presented by Mother Nature, the Judge declared:

“… after listening to the rosy-cheeked laughter of the December winds laden with the glittering snow, each flake a pattern of beauty and harmony, we conclude and find that Santa Claus is a reality. We find further that without him life would be dull and cheerless, and that with him the heart is merry and the spirit gay, as life should be….” 

Q26: So you quoted that from memory, but there must be dissenting opinions!?

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A26: Yes we learn it by heart at Santa Law School. Who could disagree with that judgement?  By the way, before answering, and the last thing I want to do is to influence your reporting in any way: you are aware that I am Santa’s

 Appointed Representative Solicitor Extraodinaire

I enjoy his full authority in this and all jurisdictions. Accordingly he relies on me to make preliminary recommendations on everyone, boys and girls, and grown ups  viz a viz their “Yuletide Expectation Present Status” (YEPS). This is colloquially known as the Good List / Naughty List.

Father Christmas knows if you have been bad or good!

Ho Ho Ho! Merry Christmas to One and ALL!nicholas-206279_1280

  • Under Licence
  • patents pending

(As revealed in conversation)

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Shareholder and Boardroom Disputes: Tips (2)

images CALM GOLDEN RULES WHITE

In the second in a series of articles, read my piece in the link below on:

http://www.luptonfawcett.com/blog/minority-shareholder-boardroom-disputes-tips-2/

  • Minority Shareholders
  • Boardroom Disputes
  • Shareholder Agreements
  • Unfair Prejudice claims

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Unfair Prejudice & Drag Along

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My analysis on Court of Appeal decision in Re Charterhouse Capital Limited; Arbuthnott v Bonnyman [2015] EWCA Civ 536 :

http://www.luptonfawcett.com/blog/unfair-prejudice-and-drag-along/

Are you a Shadow or de facto director?

Latest Court of Appeal Guidance

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The Court of Appeal has provided guidance for deciding whether someone is a Shadow or de facto director: Smithton Ltd (formerly Hobart Capital Markets Ltd) v Naggar[i]

Under the Companies Act 2006, all duties owed by a director can apply to former directors, de facto directors and “shadow directors”. It is axiomatic that creditors or liquidators will look for someone to sue when a company collapses. Given the various extensions in directors’ duties and liabilities, and widening of the class of persons covered, questions arise e.g. regarding the majority shareholder’s vulnerability, and that of other parties including directors of companies that are directors of a subsidiary.

TERMS

  • De jure Director: A director at Law, registered at Companies House
  • De facto Director: A director in Fact, although not formally appointed, but who behaves as and is taken by the company and other directors to behave as a director
  • Shadow Director: “in accordance with whose directions or instructions the Board is accustomed to act”, not being a professional adviser retained to advise “real influence over the majority of board members”; [ii]

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Group Directors, Private funders and possibly venture capitalists could fall in to the trap of becoming “shadow directors”. What would happen to them on insolvency? This is tempered by such funders commonly requiring a directorship. Following Deverell,[iii] per Morritt J., a “nod and a wink” can amount to an “instruction”. A management consultant,[iv] a parent company,[v] and a “stakeholder”[vi] have all been held to be shadow directors. A bank could be a shadow director for example.

BACKGROUND

The Court of Appeal has upheld the decision of trial judge Rose J that the Defendant Guy Naggar, was not a de facto director or shadow director of Smithton Ltd, (formerly Hobart Capital Markets Ltd). Mr Naggar was a director of Hobart’s former holding company Dawnay Day, which operated under a joint venture agreement. Hobart entered into numerous transactions with clients introduced by Mr Naggar. Following the collapse of Dawnay Day, Hobart suffered losses around £4 million. Hobart sued Mr Naggar, seeking to recoup its losses claimingng an indemnity from him, contending that while he was not a duly appointed director of Hobart, he was a de facto or shadow director of Hobart and had acted in breach of his duties owed to Hobart.

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DECISION

  • The evidence suggested that Mr Nagar was acting as chairman of Dawnay Day, Hobart’s parent company.
  • There was nothing that went beyond the involvement normally expected of someone combining the roles of major client and chairman of the majority shareholder.
  • There was no evidence that Hobart’s board were accustomed to complying with Mr Naggar’s instructions.
  • There was no basis for setting aside the judge’s conclusion that Mr Naggar had been involved with Hobart’s affairs other than in his capacity as a director of Dawnay Day or some other capacity than that of director of Hobart.
  • The judgment of Arden LJ (Elias, Tomlinson LJJ concurring) included points of general principle, applying and reaffirming the leading case of Revenue and Customs Commissioners v Holland[vii]

GENERAL PRINCIPLES

  1. There is no one definitive test whether a person was a de facto director, the question is whether he was part of the corporate governance system of the company and whether he assumed the status and function of a director so as to make himself responsible as if he were a director.
  2. Someone could be a de facto director even where there was no invalid appointment. The question was whether he had assumed responsibility to act as a director, and in what capacity he was acting.
  3. The court had to examine what the director actually did and not any job title.
  4. The court would need to consider the corporate governance structure of the company so as to decide in relation to the company’s business whether the individual’s acts were directorial in nature.
  5. The court should look at the cumulative effect of the activities relied on and should look at all the circumstances in the round.
  6. Whether an individual acted as a director is decided objectively and irrespective of their motivation or belief. A defendant did not avoid liability if he showed that he in good faith thought he was not acting as a director.
  7. Even a single directorial act could lead to liability in an exceptional case
  8. It was also important to look at the acts in their context. Relevant factors included whether
  • the company considered him to be a director and held him out as such
  • third parties considered that he was a director
  • a person was consulted about directorial decisions or his approval did not in general make him a director because he was not making the decision
    1. Acts outside the period when he was said to have been a de facto director might throw light on whether he was a de facto director in the relevant period.
    2. An individual can be both a shadow director and a de facto director at the same time, and there can be overlap.
    3. A de facto or shadow director’s role doesn’t have to cover all the company’s activities.
    4. Whether a person was a de facto or shadow director is a question of fact and degree.

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CONCLUSION

  • Where someone is a director of a holding company which is its subsidiary’s corporate director, provided that what that individual does is wholly within the ambit of his duties and responsibilities as a director of the corporate director/holding company, his acts would not make him a de facto director of that subsidiary (as in the instant case).
  • Groups of companies, directors (and those who may fall within the definition of de facto or shadow director of a holding company) should consider whether the directors of the parent company are an integral part of the subsidiary’s corporate governance and would be exposed to being deemed either de facto or shadow directors, or both.
  • This case helpfully applies the general principles and puts them in context.

 

[i] [2014] EWCA Civ 939

[ii] 251(1) of the Companies Act 2006

[iii] Deverell [2001] Ch. 340 CA (Civ Div

[iv] Tasiban Ltd (No.3), Re [1991] B.C.C. 435; [1991] B.C.L.C. 792 Ch D.

[v] Hydrodam (Corby) Ltd, Re [1994] B.C.C. 161; [1994] 2 B.C.L.C. 180 Ch D

[vi] Deverell [2001] Ch. 340 CA (Civ Div).

[vii] [2010] 1 WLR 2793

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